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The Wall Street Journal: Options Bets on Crude Could Pull Prices Higher: The wagering over $100 oil has begun in earnest

Wall Street Journal chart

October 22, 2007; Page C6

The wagering over $100 oil has begun in earnest.

Oil prices, which rose briefly above $90 a barrel Friday, are more likely to head toward $100 than $80 in the next month, according to the number of bets placed by options traders on the New York Mercantile Exchange.

The large number of options held to buy crude at $100 a barrel could also act as a pull on prices toward that level.
A breach of $100, long deemed a far-fetched notion, would bring the price of oil toward $101.70, its inflation-adjusted cash-market peak hit in April 1980, when the Iranian revolution and the outbreak of the Iran-Iraq war sent oil prices soaring.

As of Thursday, there were nearly three times as many options held to buy the December crude-oil-futures contract at $100 a barrel as there were to sell the contract at $80, according to Nymex data. Friday data weren’t available.

Concentrations of bets on options at certain levels can act as a magnet for crude-oil prices as the options-expiration date approaches, as big traders try to push futures prices to levels where their options positions become profitable. Options on the December contract expire Nov. 13.

“There is no reason to think that the top is in, and if anything, the upside will accelerate now that $90 a barrel has been taken out,” said Nauman Barakat, senior vice president at Macquarie Futures USA in New York. “The market is already focusing on the huge open interest on the December $90 calls (50,150) and the $100 calls. This open interest will act as a gravitational pull to $100.”

Holders of an option to buy at $100 — known as a call — benefit when prices rise above that level because when they exercise the option, they can instantly profit by selling at a higher price. Likewise, holders of options to sell, or puts, profit when prices fall.

Crude-oil prices have surged 13% in the past nine trading days. The November light, sweet crude contract on the Nymex settled 87 cents lower at $88.60 a barrel, after earlier rising to an intraday record of $90.07.

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